Pension Fund Bond Demands Exceed Supply

According to Reuters, in a report on trends in financial markets, the group said it had tried to gauge the size of potential pension fund demand in Group of 10 countries for bonds and to match it to current supply, and concluded that “pent-up demand could be very substantial.”   OECD added that potential shortages would vary depending on the maturity and currency of bond issuance.

“Potential ‘scarcity’ would be greatest (in absolute values) in the United States and in the maturity segment beyond 10 years,” it said, according to Reuters.

The OECD noted that G10 pension funds held about $15 trillion in 2004 while the amount of long-term government debt came to less than $4 trillion. A gap that wide would mean even a modest allocation to long-term government debt would run into scarcity, but the OECD suggested that a 75% allocation for pension funds was not unrealistic.

Long-term yields have remained relatively low, in part because of pension funds increasingly seeking long-term debt in order to meet liability matching requirements imposed on them by regulators.   The OECD suggested that it may also be because other investors may have been acquiring bonds in anticipation of significantly increased pension fund buying in the future.

The OECD Web site is www.oecd.org .